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Agreement Reached With Cigarette Tax Stamping Agent

Attorney General Spitzer today announced that one of the state's largest cigarette tax stamping agents has agreed to stop supplying unstamped cigarettes to companies that illegally re-sell them over the Internet or by mail order.

"This is the latest step in our ongoing effort to shut down illegal cigarette traffickers," Spitzer said. "These organizations prosper because they illegally obtain access to unstamped cigarettes. My office intends to do everything it can to reduce the diversion of unstamped cigarettes into the black market."

The agreement announced today with Harold Levinson Associates ("HLA"), based in Farmingdale, is the first of its kind.

A statewide association of retailers hailed the development.

"I applaud Attorney General Spitzer and Harold Levinson Associates for their initiative in moving New York State one step closer to a level playing field for all sellers of tobacco products," said James Calvin, President of the New York Association of Convenience Stores. "Everybody loses when cigarettes are sold without age verification or tax collection. State and local governments lose hundreds of millions of dollars each year in tax revenues. Brick-and-mortar retailers lose an enormous volume of legitimate trade. And public health loses because it thwarts efforts to prevent youth access to tobacco - - and to encourage smokers to quit by making it too expensive.

Tax stamping agents like HLA are licensed by New York State and purchase tax stamps from the state. Tobacco manufacturers sell their cigarettes to the licensed stamping agents, which place tax stamps on the packages and then re-sell them to licensed cigarette wholesalers and retailers.

Certain entities - - such as the federal government, the United Nations and Indian tribes - - are permitted to purchase unstamped cigarettes for their own use, but must provide the stamping agent with certification that they are exempt from taxes. Some entities, claiming to be exempt from taxes, have purchased huge quantities of unstamped cigarettes from licensed tax stamping agents, and have then illegally sold those cigarettes over the Internet to purchasers who should have been charged taxes. HLA sells more than 80 million packs of unstamped cigarettes per year.

This has resulted in immense profits for illegal cigarette traffickers. The New York State excise tax is $1.50 per pack and New York City imposes its own excise tax of an additional $1.50 per pack. Thus, while a carton of stamped cigarettes might cost $65.00 in a retail store in New York City, a carton of unstamped cigarettes can be purchased on the Internet for less than $30. This price differential  which is caused almost exclusively by illegal tax evasion  has led to the significant growth in Internet sales.

Today's agreement with HLA is an important step towards stopping these practices by the Internet retailers located in New York. In particular, the agreement prohibits HLA from selling unstamped cigarettes: (1) to anyone who is not exempt from paying taxes; and (2) to anyone known to be engaged in unlawful Internet sales. In addition, HLA will hire an independent compliance officer to ensure compliance with the agreement.

"We intend to ask all New York State licensed stamping agents to sign similar agreements, so that this becomes a model for the industry," said Spitzer. "If we are successful, it will be a major step towards cutting off the supply of unstamped cigarettes to Internet sellers in New York."

There are approximately 100 licensed stamping agents in New York, of which only about 20 sell unstamped cigarettes.

providing traffickers with a major source of funding for other criminal activities;

diverting business from legitimate "mom-and-pop" retailers;

providing an easy way for children to get access to cigarettes;

increasing smoking rates; and,

increasing smoking related health care costs borne by taxpayers.

Today's announcement is the most recent action in the Attorney General Spitzer's ongoing multi-pronged effort to stop illegal cigarette trafficking. In March 2005, Spitzer and other state attorneys general announced a landmark agreement under which the major credit card companies agreed to stop processing payments for the illegal Internet sellers. In July 2005, Spitzer announced that DHL had agreed to stop shipping cigarettes directly to consumers nationwide, and a similar agreement was reached with UPS in late October. Spitzer also has called on Congress to pass legislation preventing the United States Postal Service from delivering cigarettes to consumers.

"In order to survive, Internet cigarette traffickers need a supply of unstamped cigarettes, a mechanism for obtaining on-line payments, and the means to quickly deliver their product to consumers," said Spitzer. "By addressing these three vital areas  supply, payment and delivery  we hope to greatly reduce illegal Internet cigarette trafficking nationwide."

Discussions with HLA were handled by Assistant Attorney General David Weinstein, Special Counsel for Affirmative Litigation.

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